Money is not scarce. Conviction is.

When the world is flooded with liquidity, the scarcity simply moves: from capital to the ability to find something that deserves to receive it.

For a long time I thought money naturally occupied the position of power in a financial negotiation. It seemed intuitive. On one side is whoever needs capital; on the other, whoever has it. The second can wait, compare opportunities, and choose. The first frequently has a deadline, a need, or urgency. That asymmetry exists and should not be ignored. But I have begun to see that it is less stable than it looks. There are moments when capital stops being the rare thing at the table. When that happens, the difficulty migrates to the other side.

Perhaps this is one of those moments.

On Thursday, the European Central Bank took its main refinancing rate to zero. The rate charged for institutions to leave money deposited at the central bank became negative at 0.40%. In addition, the asset purchase program will be raised to €80 billion a month and will start including certain corporate bonds. New long-term facilities were also announced, with four years' duration and terms that, depending on the banks' behavior, can reach extraordinarily low levels.

The number that interests me most is not zero.

It is eighty billion a month.

When an institution with the ECB's capacity for monetary creation and influence decides to buy that quantity of assets continuously, the vulgar interpretation is simple: there will be more money available. The interpretation that seems more interesting to me is another. There will be more money looking for somewhere to sit.

That difference changes the problem.

Imagine a man with little capital and many opportunities before him. Naturally he treats money as a scarce resource. He has to choose because he cannot take part in everything. Now imagine the opposite: a family, bank, insurer, or fund with a lot of capital and an economic obligation to remunerate it. The scarcity stops being money. It becomes an investment good enough to justify using it.

Perhaps a good part of the financial industry exists inside that second problem.

It is strange because everyday language creates the impression that investors are doing a favor to whoever receives money. "We got an investor." "The bank released the credit." "The fund came into the operation." The phrasing naturally places capital in the position of the one granting something. In many cases, it is exactly that. But a manager with a few billion to invest also desperately needs good assets. If he does not find them, his initial advantage turns into an obligation.

Too much capital can be a form of pressure.

That explains some behaviors that, observed superficially, look irrational. Rates fall. Spreads compress. Investors start accepting structures they would previously have rejected. Mediocre assets receive prices previously reserved for good ones. Managers enter markets they did not know because the market they knew stopped offering enough return.

We call that the search for yield as though naming the behavior made it less human.

Perhaps it is merely hunger.

When there is a lot of money for few good assets, capital starts competing for the privilege of being invested.

That changes the way I think about origination, a subject that occupied me for much of last year. I had reached the conclusion that a good borrower constitutes an asset for whoever has capital. Now the conclusion seems even more important. If the supply of money increases while the supply of genuinely financeable companies does not increase in the same proportion, whoever controls good deal flow occupies a more valuable position.

A fund can raise capital quickly.

It cannot manufacture good businessmen at the same speed.

A family office can become liquid overnight after selling a family company. It can receive hundreds of millions into its account. The wealth appeared instantly. A machine capable of finding and selecting opportunities suitable for that wealth does not arrive with the same bank transfer.

That difference may be one of the reasons so many newly liquid families end up, at least initially, buying what the banks present.

Not necessarily because the products are bad. Some will be excellent. The problem is more structural: the bank already has distribution; the family does not yet have origination of its own.

Money arrived before the infrastructure needed to administer it.

A businessman spends thirty years building a company and, when he sells it, can receive in a single week more liquidity than he personally managed in his entire life. Suddenly his problem changes nature. Before, he had to generate cash. Now he has to prevent the cash from becoming a permanent invitation for other people to sell him something.

It is a change of phase that perhaps does not receive enough attention.

Making money and allocating money are different skills.

It is perfectly possible to be extraordinary at the first and mediocre at the second.

In fact, it may be common.

The man who built an industry knows suppliers, margins, clients, costs, competitors, and the people of that sector deeply. Concentration was possibly an advantage. He knew more about that business than almost everyone around him. Then he sells and receives a large quantity of money. Immediately he is expected to be competent in government bonds, currencies, private credit, private equity, real estate in different geographies, funds, derivatives, succession planning, and a series of subjects that have little to do with the competence that produced the fortune.

It is a strange expectation.

Nobody would say an excellent surgeon should automatically be an excellent architect because both professions require intelligence.

With money we do exactly that.

Perhaps family offices exist in part to solve that problem: separating the intelligence that created the wealth from the infrastructure needed to administer it.

The more I think about it, the less the definition of a family office as an office that "manages a family's investments" interests me. It sounds like a bureaucratic reduction. A family with large wealth does not merely need someone to select funds. It needs an institution that knows its total economic position and can think about capital in a less fragmented way.

The operating company is part of the estate.

So are the debts.

The properties.

The collateral.

Private stakes.

Liquidity.

Legal risk.

Family needs.

Currencies.

Financial investments.

Direct opportunities.

Succession.

A decision in any of those areas changes the others.

That means a family can have an excellent financial portfolio and a bad wealth structure. It can obtain a few extra points of return on investments while keeping an expensive corporate debt that should have been refinanced. It can hold a large concentration in its company and, without noticing, buy through funds an even larger amount of exposure to the same sector.

It can sell a good property to generate liquidity when it could have obtained credit against it on better terms.

Or do the opposite: take on unnecessary debt to avoid selling an asset whose outlook has already deteriorated.

There is no "best investment" separate from the whole position.

That may be one of the greatest advantages of having someone looking at the estate as a system.

And the more capital there is available in the world, the more important that function becomes. In periods of scarcity, the investor has to figure out how to obtain money. In periods of abundance, he has to figure out how not to be seduced by the number of available ways to invest it.

There is a paradox there. A lack of options requires creativity. Excess requires discipline.

The second can be harder.

When a family has R$ 10 million and a good opportunity requires R$ 20 million, the restriction itself eliminates the decision. When it has R$ 1 billion, almost everything looks small enough to fit. The responsibility to say no comes to depend exclusively on judgment.

Perhaps that is why wealth increases the value of the filter.

Money buys access, but it also attracts supply.

The larger the estate, the more frequently products, funds, operations, properties, companies, credits, and "exclusive" deals arrive. The abundance of access can create the feeling that the problem is solved. Perhaps it has merely grown.

The investor goes from hunter to prey without noticing.

It is an unpleasant image, but a useful one.

There is an entire industry paid to put other people's capital in motion. There is nothing morally wrong with that. Managers have to raise funds, bankers have to distribute, originators have to close operations, funds have to invest. The problem appears when the owner of the capital forgets that the seller's urgency should not become his urgency.

Patient capital holds an extraordinary advantage: it can say no.

From the moment it starts believing it has to be fully invested, it begins handing that advantage back to the market.

Perhaps conviction is exactly the ability to wait until an operation is good enough.

Not conviction in the juvenile sense of believing strongly in an idea. That is cheap. People manage to hold enormous convictions about subjects they do not understand.

I mean conviction built after analysis, comparison, structure, and an understanding of the downside. The ability to put up capital when all the elements make sense and, until that moment, to accept that doing nothing is also a position.

In environments of very low interest, that discipline becomes psychologically more expensive.

Idle money seems to lose.

Cash produces little or nothing.

The investor sees other people finding returns.

The pressure rises.

Then he starts lowering the bar without admitting he lowered it.

First he accepts a little less spread. Then a little more duration. Then somewhat worse liquidity. Then collateral he would previously have considered insufficient. Each concession in isolation looks reasonable. The problem is in the accumulation.

Nobody has to go mad.

Fragility usually enters through the door of small exceptions.

That is why the ECB's decision seems interesting to me beyond European monetary policy. The central bank wants to stimulate credit and activity, and it makes sense that its instruments reduce the cost of financing. But from the investor's point of view, there is a practical consequence: capital is encouraged to leave safe places and look for return elsewhere.

That migration can finance productive companies.

It can also reduce the price of risk.

Both things can happen simultaneously.

The financial world has difficulty living with that duality because it prefers simple moral stories. Cheap money helps or cheap money harms. Credit is good or credit is bad. Banks lending are productive or irresponsible.

Reality is under no obligation to pick a side.

The same mechanism can be necessary today and create dangerous incentives tomorrow.

That is particularly important when central banks also start buying corporate debt. A new source of demand enters the private bond market directly. Even companies that will never sell a bond to the ECB can feel the indirect effect if investors displaced from those assets look for alternatives.

Capital moves down the risk curve.

An insurer that cannot find enough yield in a given bond buys another.

A fund losing spread looks for private credit.

A family accustomed to fixed income notices the return no longer meets its objectives and agrees to look at direct investments.

The border between markets starts to move.

Perhaps that is why direct lending and forms of credit outside banks are becoming more and more relevant. After the 2008 crisis, banks carry new requirements, reduce some exposures, and reassess activities. At the same time, insurers, asset managers, funds, and other investors have capital. The borrower who previously depended exclusively on the bank can find creditors outside it.

That change interests me a great deal.

Not because I believe banks will stop mattering. That would be a childish conclusion. Banks have funding, relationships, systems, payment capacity, distribution, and enormous credit knowledge.

What is interesting is that they stop being the only conceivable door.

The market starts gaining more corridors.

For a loan broker, that radically changes the value of the map.

If all borrowers necessarily have to go to the same five banks, knowing fifteen other sources of capital has little value. When credit funds, institutional investors, securitizations, private structures, and family offices willing to assess operations directly appear, the ability to know different appetites becomes an asset.

The broker stops being merely someone who knows bankers.

He can become a router of capital.

But there is an enormous difference between being a router and being a postman.

The postman receives a request and delivers it to several places.

The router understands the nature of the request and chooses the most appropriate path.

A company may need R$ 30 million.

That number explains nothing.

It can be to finance inventory for six months.

It can be to buy a factory.

It can be an acquisition.

It can replace expensive debt.

It can be a bridge until a property is sold.

It can finance a development.

Each purpose produces a different financial asset.

Each should live on a different balance sheet.

The bank that likes receivables may not like acquisitions. A credit fund may accept a longer tenor. A family office may understand real estate collateral particularly well. A private investor may want to take part only if there is some participation in the upside.

The demand is R$ 30 million.

The right capital is not fungible.

That is almost a contradiction. Money is fungible, but sources of money are not.

Each source has restrictions, horizons, regulation, incentives, cost, and experience.

Perhaps one of the most valuable functions of a financier is precisely understanding those differences.

When a businessman says he needs money, the question should not merely be "who has it?"

It should be "who should have this operation?"

That change looks small and may be the difference between selling money and organizing capital.

I have been thinking more and more about that second expression.

Selling money sounds commercial.

Organizing capital sounds structural.

The first question is how to close.

The second is how to make the deal remain adequate after the closing.

Loan broking done well may lie exactly in that transition.

The broker can be paid for origination and still think like someone administering the quality of a network of relationships. If he delivers a bad operation to an institution merely because he needs a commission, he may earn today and destroy access tomorrow.

A relationship with a source of capital should be treated as an asset.

You do not send just anything to a good creditor.

There is a cost of attention.

If an institution starts associating your name with operations that do not fit its policy, it begins ignoring you. It is like the boy in the fable who cries wolf. The first call gets attention; afterward, each call loses value.

The good originator preserves attention.

That may be even more important when capital is abundant. It is tempting to imagine that, with so many investors looking for yield, any operation will find someone.

It may find someone.

The question is which relationship will be consumed for that, and at what price.

There is credit that is too expensive even when the borrower agrees to pay.

An operation can solve the immediate need and create a refinancing problem two years later. It can require excessive collateral. It can compromise a strategic asset. It can introduce covenants incompatible with the business.

The intermediary who sees only the initial commission does not have to worry about that.

The financier who wants to keep the client for decades should.

That difference may bring the loan broker closer to a family office.

I am not saying they are the same activity.

But there is a convergence of incentives when the relationship becomes more important than the product.

A transactional broker asks: which credit can I close for this businessman?

A wealth adviser should ask: what does this debt do to this businessman's entire estate?

Those are different questions.

Sometimes the best available credit is still a bad operation for the family.

Imagine a businessman with 90% of his fortune inside a company. He can take on debt personally against properties to put more money into the business. The isolated operation can be solid and sufficiently secured. However, the decision further increases his economic concentration in a company on which his income, wealth, and identity already depend.

The problem is not the rate.

It is the invisible portfolio.

The family office should see that.

Likewise, the opposite can happen. A businessman has high-quality personal assets and needs capital in the company for a few months. The bank offers expensive corporate credit because it sees a certain operating risk. A structure secured by personal wealth can dramatically reduce the cost without substantially changing the economic risk the family already carries.

The solution appears only when someone sees both balance sheets.

Company and family.

That seems particularly relevant in Brazil, where corporate and personal wealth are frequently connected economically even when legally separate. The businessman may hold properties, stakes, investments, receivables, and collateral scattered around. The bank sees one part. The brokerage sees another. The accountant, another.

Perhaps nobody sees the whole table.

Whoever sees the whole table has an advantage.

He can negotiate better.

He can choose the right asset to pledge.

He can avoid giving the bank far more protection than necessary.

He can compare the cost of capital with the return on existing investments.

Perhaps the money is hidden exactly in that coordination.

Not in finding a miraculous investment.

In avoiding isolated decisions that look excellent individually and bad when put together.

That is one of the reasons I am becoming more and more interested in multi family offices. A single family office can justify its own team when the wealth is enormous. For smaller families, sharing infrastructure seems economically more rational. Lawyers, tax specialists, investments, credit, wealth consolidation, and access to opportunities can be distributed among several families without each having to build everything from scratch.

But there is a problem.

The multi family office can easily turn into a sophisticated brokerage with better furniture.

If its revenue depends on distributing products, the institution can adopt family office language while keeping a salesman's incentives.

The name does not settle it.

Once again, one has to look at who pays, how they pay, and what happens if the best decision for the family is to buy nothing.

True advice starts being tested when the economically correct recommendation reduces the adviser's own revenue.

That is a good way to discover who really represents whom.

There is no model without conflict. Even a fixed fee produces incentives. The objective is not to imagine a morally pure institution, but to build one in which the conflicts are visible and manageable.

That question will probably become more and more important as family offices gain access to private investments. Direct deals and club deals are fascinating because they let the family leave the passive position of fund holder and take part directly in certain assets.

But that freedom brings work.

A direct stake in a company does not come with all the infrastructure a fund provides. Someone has to analyze, negotiate rights, monitor, consolidate information, take part in decisions, and eventually exit.

A direct loan requires even more operational discipline.

Who monitors covenants?

Who receives information?

Who verifies the collateral?

Who collects installments?

Who decides on a renegotiation?

Who enforces in a default?

A club deal of five families can look elegant when the check is signed. It can become an expanded family meeting when the first problem appears.

Private does not mean simple.

Often it means you will have to build privately what the public market already offers as infrastructure.

That may explain why the best family office networks are so valuable. They do not merely offer opportunities. They offer repetition.

Families that have already made direct investments develop processes, legal relationships, criteria, references, and the ability to assess originators. A family entering an operation for the first time can co-invest with another that knows the sector.

That is a kind of shared intellectual capital.

The club deal, in that sense, does not merely split a check.

It can split competence.

Naturally, it can also split error.

Five families doing the same operation do not make the risk five times more intelligent.

That is the danger of social validation in private environments. If some well-known families take part, the operation acquires an aura. The newcomer thinks someone must certainly have analyzed it deeply.

Perhaps everyone is thinking the same thing.

It is a sophisticated version of the crowded restaurant: it must be good because there are many people.

With wealth, that reasoning can be expensive.

Co-investment does not replace conviction of one's own.

That brings me back to the central word of this letter.

Conviction.

I cannot think of a better definition than the ability to take a position after understanding well enough why it exists, how it wins, how it loses, and what role it plays inside your portfolio.

Conviction is not enthusiasm.

Enthusiasm increases with the presentation.

Conviction should increase with information.

It is perfectly possible to have conviction and still be wrong. The goal is not infallibility. It is reducing the chance of being wrong for reasons that were available from the start.

Perhaps the good investor should be able to explain not merely why he bought, but which fact would make him change his mind.

Without that, the thesis becomes an identity.

And identities are terrible intellectual stop-loss mechanisms.

When someone says "I am a real estate investor," he starts seeing every cycle as confirmation that real estate remains good.

"I am an equity investor."

"I am conservative."

"I am an entrepreneur."

Each label creates a small prison.

Wealth should not have to stay coherent with our personality.

It should obey reality.

If private credit offers a better asymmetry than a given stock, look at credit.

If cash offers a better option than a bad investment, hold cash.

If a debt needs to be amortized before buying another asset, amortize.

No instrument deserves loyalty.

That is another reason a family office seems a more interesting concept to me than investment management. In theory, the office should be product-agnostic.

It does not have to defend funds because it sells funds.

It does not have to defend equities because it works with equities.

It does not have to defend credit because it is a broker.

It should organize resources according to the family's need.

That independence is rare because the financial market is structured in product silos.

Whoever works with insurance sees insurance.

Whoever works with credit sees credit.

Whoever sells funds finds funds suitable for a variety of problems.

Perhaps the client needs precisely someone who has no commercial obligation to start from the solution.

Start from the problem.

That sounds so obvious it is probably a competitive advantage.

Excessive institutional specialization creates opportunities for whoever can coordinate specialists without becoming a salesman for any of them.

Perhaps a multi family office can occupy exactly that place.

Not manufacturing every product.

Knowing who manufactures.

Not granting every credit.

Knowing the sources.

Not necessarily managing every investment.

Selecting managers.

Not executing the whole legal structure alone.

Coordinating lawyers.

The institution becomes an orchestrator.

That looks a lot like what I have been thinking about intermediation since 2010, merely applied to a larger problem.

The valuable intermediary does not have to own all the assets.

He has to make the network more useful by his presence.

Perhaps I was arriving at the concept of a family office without knowing the name when I wrote that I wanted to stand between capital and need.

Now I can see a broader possibility.

Standing between the estate and the entire financial system.

Representing the estate's side.

That position may be one of the most powerful in the market because it changes who controls distribution.

Normally the bank owns the client and presents products.

If the family office holds the main relationship, the banks start competing to meet a need defined by someone else.

That changes incentives.

The client stops being led to the shelf.

The shelves have to compete for space on the client's table.

It is an important inversion.

In credit, the same thing happens.

A businessman who depends on a single bank accepts the terms available.

A businessman with a good loan broker or family office able to access banks, funds, and private capital turns suppliers of money into competitors.

Competition improves price and structure.

Not automatically, but it increases options.

Optionality has value even when it is not exercised.

That may be one of the invisible products of a relationship.

A businessman may never use a given source of capital. The simple fact of having access changes his position before the current source.

Likewise, a family with relationships with several managers does not have to change managers to negotiate better. The credible alternative already exerts pressure.

Access is power when it can be converted into an option.

The word access, however, has to be used carefully because the financial market knows how to turn it into marketing.

"Exclusive product."

"Only for selected investors."

"Reserved opportunity."

That can be economically true or merely an elegant way of using artificial scarcity to increase desire.

I have an increasingly simple rule: if the main argument for an investment is that few people can buy it, they probably have not yet explained the investment to me.

A club deal should be good even if nobody knew it was a club deal.

A private bank product should be assessed without the private bank's logo.

A family office investment should survive the removal of the name of the family that originated it.

That mental exercise may prevent a lot of money lost to status.

Wealth should buy freedom.

It is absurd to use it to buy belonging.

Even so, that happens because money does not eliminate insecurity. It merely allows financing it at a larger scale.

Perhaps that is why wealth institutions also need to protect their clients from themselves.

Not through paternalism. The family owns the wealth.

But through process.

Record the thesis.

Compare alternatives.

Make the downside explicit.

Ask the economic reason for the decision.

When the desire to take part comes mainly from the fact that other wealthy people are taking part, at least put it on the table.

The ridiculous loses some force when it has to be written down.

That can also hold for me if someday I work originating credit at relevant scale. It is easy to fall in love with a reputation for "solving" difficult operations. There may even be status inside the market in obtaining capital for those everyone else refused.

Dangerous.

The loan broker's function should not be proving that every credit is financeable.

Some should remain unfinanced.

The value lies in knowing which.

When money becomes abundant, that discipline becomes even more important because someone willing to do an operation will always appear.

Finding a check does not demonstrate the operation was good.

It merely demonstrates someone accepted.

In euphoric markets, the worst credit can look perfectly financeable until the last month.

Perhaps the scarcity of true conviction becomes especially visible in those moments. There is a lot of opinion because everyone has to justify where they put capital. There is little capacity to say "I do not know" and keep money idle.

I do not know is a financially underrated position.

It yields no commission.

It yields no performance.

It yields no interesting story.

But it prevents ignorance from being turned into risk.

Perhaps a good financial institution needs to institutionalize the right not to know.

If nobody understands a given product well enough, do not buy it.

If nobody can explain where the payment will come from, do not lend.

If a private opportunity is good only inside a very precise Excel scenario, perhaps pass.

That does not require genius.

It requires the freedom to stay out.

Some commercial structures do not have that freedom. A fund has to invest within its mandate. A bank has to produce business. A broker needs commissions. A manager can face redemptions if he strays too far from the benchmark.

The family may hold one of the purest forms of financial freedom.

It does not have to buy.

It does not have to sell.

It does not have to report to outside investors.

It can have a horizon of decades.

That is such a large advantage that it would be tragic to waste it trying to imitate the behavior of institutions with completely different constraints.

Perhaps the objective of the family office is preserving that advantage.

Patient capital.

Broad access.

Rigorous process.

Little need to explain quarterly performance to third parties.

The ability to act when opportunities genuinely appear.

That comes close to what I consider a robust structure.

It does not maximize each year.

It maximizes continuity and optionality.

It may produce inferior returns during long periods of euphoria. Everything with a margin of safety looks inefficient before the safety is needed.

That does not bother me.

I am beginning to have less and less respect for rankings built over short periods. The strategy that gains most over five years may simply be the one most exposed to the factor that worked for five years.

We will only find out later.

The same caution holds for credit. An originator showing extraordinary growth may have genuinely become much better at finding borrowers. He may also merely have relaxed selection.

Volume appears now.

Default appears later.

The temporal difference lets incompetence wear the clothes of growth.

A portfolio has to age before we find out.

That may be a central challenge for any origination platform that grows. Technology can brutally accelerate the entry of operations. It cannot accelerate in the same proportion the time needed to observe their behavior.

There is a natural limit.

Risk has to age.

Perhaps that is why reputation is so valuable. An originator with ten years of track record carries information a six-month-old platform simply cannot invent.

Technology can organize.

It cannot manufacture a past.

That combination interests me.

People have relationships and history.

Systems have the capacity to organize, record, and scale.

Perhaps the future of origination is not replacing the broker, but making the good broker less handmade.

It is early for me to know.

But I keep noticing the same operational deficiency I mentioned last year. The more private the market, the more frequently important information is scattered across conversations, files, emails, and memory.

There is intelligence in the relationship.

There is fragility in the process.

A family office can have extraordinary access to club deals and still track its investments in a collection of spreadsheets.

A loan broker can know dozens of institutions and still keep credit policies in his own head.

A businessman can have R$ 100 million in wealth and not know, on a single screen or report, exactly what his consolidated exposure is.

The market sophisticated the products faster than it sophisticated some of the tools used to coordinate them.

There may be something there.

But I do not want to run to a solution yet.

The conclusion of 2016 comes earlier.

Capital is not the scarcest thing in the system at all moments.

In periods like this one, there seems to be too much money looking for some reason to move.

That changes the relative value of skills.

The man with the check remains important.

But the man capable of producing conviction about a good operation may be even rarer.

Conviction requires origination.

Analysis.

Context.

Structure.

Relationships.

And, perhaps above all, the capacity to refuse.

Whoever has all those things can put capital to work without having to chase every hundredth of return the market offers.

That is a form of financial sovereignty.

Not depending on a shelf.

Not depending on a bank.

Not depending on a single asset class.

Not depending on the next deal.

Being able to wait.

Being able to choose.

Being able to say no.

And to act big when something finally appears that deserves a yes.

That is perhaps how I would like to manage wealth someday.

Not as a tourist running from product to product looking for a few extra points of yield.

As someone who builds a network good enough for opportunities to arrive, a process rigorous enough for most to be refused, and a structure liquid enough to act when one of them turns out to be extraordinary.

That holds for investments.

It holds for credit.

It holds for a family office.

It holds for a loan broker.

Perhaps even for business life.

Abundance does not eliminate scarcity.

It merely changes the scarce object.

For a long time I thought I had to find out where the money was.

Now I am beginning to suspect that question is becoming less important.

Money exists.

The better question is:

where is the conviction?

Leo Bentier